Wednesday, 19 September 2012

USA is still doomed


John Mangun
http://www.mangunonmarkets.com/usa-is-still-doomed/

A PERSON suffering from hypoglycemia (low blood sugar), often a result of diabetes, might eat a piece of fruit or candy to get his body functioning properly again. But it is a temporary treatment only, as this emergency remedy does not solve the long-term problem and, if done too often, may actually make the condition worse.

Now you completely understand why quantitative easing (QE) has been and will continue to fail.

The US Federal Reserve announced this past week its QE3 program, which will see the Fed pump at least another $600 billion into the US economy. Some economists see the number rising to as much as $2 trillion. That is because there is no cap or time limit on this latest QE. The Fed intends to keep interest rates at near zero for as long as it takes to get the economy running properly again. It will do this by buying Mortgage Backed Securities, which means that home buyers will pay a lower-than-market rate for their mortgage. By lowering the mortgage interest rates, the Fed expects more home sales, as housing and related industries making up as much as 30 percent of the US economy.

The Fed has only two tools to push the economy. It can keep interest rates low or it can loan money to the national government, which then puts that money in the economy through a variety of ways.

This is an offshoot of Keynesian economic theory that says that the government can pump prime the economy. It has not worked before, and it will not work now because the US economy is already overloaded with debt.

The Fed believes there is not enough cheap money in the economy. It is wrong. US consumers and businesses are holding nearly $9 trillion, the most in history, in low-interest-paying bank accounts. In 2010 that amount was less than $8 trillion. Americans have saved $1 trillion in two years. That means that the banks have $9 trillion to lend at low interest rates. No one wants to borrow that money to spend to build the economy. More cheap money pumped into the economy through low interest rates will have a negligible effect.

Americans are not spending because the economy is not creating enough good-paying jobs. Most of the significant job creation is in the lower-paying service industry. Moreover, when fearful of the future, people save and consumer confidence has been falling most of 2012.

Why is the USA still doomed?

I wrote back in June to expect this round of QE before the end of September. It is a political move to bolster Obama’s chances of re-election. On the news of the Fed program, credit-ratings company Egan-Jones lowered the rating of the US to “AA-” from “AA.” In its downgrade, the firm said that issuing more currency and depressing interest rates “does little to raise the US’s real gross domestic product, but reduces the value of the dollar.”

So who cares if the US dollar is weak? It creates something I have spoken of many times: currency-induced cost-push inflation. This type of inflation creates asset bubbles that occur regardless of supply-and-demand factors. The euro is up a massive 8 percent since the end of July, while Europe drowns in debt.

The Dow Jones is up 13 percent since June, while companies like Hewlett-Packard and Cisco drop jobs. So far this year, US banks have announced more than 17,000 job cuts. While cost cutting may have a temporary positive effect on profits, those people being fired are the future customers. US industrial production fell 1.2 percent in August, with consumer goods dropping over 1 percent and utilities reporting a huge 3.6-percent fall in output.

Demand is down and supply is stable, but crude oil is up 27 percent since July. Consumers are buying less, and yet inflation is up 2.1 percent year on year.

Currency-induced cost-push inflation is disastrous for the US economy as price increases are both shrinking businesses’ profit margins but also increasing costs for essential goods, leaving little left over for expanding economic activity through discretionary spending on that new gadget. And how do Americans pay for the new iPhone? Credit cards, another form of “fake” money.

The current QE3 will not boost the economy fast enough to provide money to pay down the $16 trillion worth of government debt. Because of slow growth, the US standard of living will continue to fall. Currency-induced inflation will cripple the ordinary citizen.

The US is doomed and countries like the Philippines are the winners.

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